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"Kee" Points with Jim Kee, Ph.D.

Markets and Trade

Skinny Nafta

Europe

Robo-Advisors

Markets and Trade

Marketswere up on Monday as the Trump administration and China took a more conciliatory tone on trade issues. The implementation of previously mentioned tariffs (taxes on imports) on Chinese goods has been delayed until June, and over the weekend US Treasury Secretary Steven Mnuchin said that the US was “putting the trade war on hold” (WSJ). And indeed, it appears that both the US and China are interested in negotiating and resolving trade conflicts, at least for this week anyway! Examples include China’s recent pledge to buy more US agricultural products and energy and services, while reducing tariffs on imported US automobiles. In return, the Trump administration has indicated a willingness to relax the sanctions on Chinese telecom company ZTE Corp. ZTE relies on US suppliers like Qualcomm for key components (it is the 4thlargest vendor of mobile phones in the US). The Trump administration had banned US sales to ZTE Corp as a penalty for ZTE evading US sanctions against Iran and North Korea (WSJ). Trump tweeted yesterday that the administration is continuing negotiations on a larger trade deal with China.

Skinny NAFTA

On a more negative trade note, the US missed a Thursday deadline last week for a renegotiated North American Free Trade Agreement (NAFTA). But enthusiasm is growing for a rewrite known as “skinny NAFTA,” which would include limited changes without altering US law (WSJ). That is important because it would not require a Congressional vote.

Europe

Interest rates have turned up a bit in Europe, particularly for some of the countries still struggling with the debt crisis that came to light in 2009. Greek 10-year Treasury yields at 4.5% are roughly double those of the rest of Europe (they all still sound too low to me), with Italy at 2.4%, Portugal at 2%, Spain at 1.5%, France at .8%, and Germany at .5%. Europe has made much progress on bank strength and financial/regulatory reforms, which are too numerous to list but can be found on the European Commission’s website.

But Europe needs growth, and many countries (e.g. France, Italy) are pursuing tax cuts to spark growth. In the near-term that will increase budget deficits, and that in-turn tends to run afoul of the more stringent budget deficit rules adopted after the debt crisis began (in addition to pre-existing budget rules for euro currency area countries). Italy, with a coalition of two “anti-establishment parties” about to take power (5 Star Movement and the League), has garnered the most headlines recently with regard to this pressure to relax some of the budget rules imposed after the debt crisis. I think we will see more of this policy tension (tax cuts versus budget constraints) coming from European countries over the next 12 months.

Robo-Advisors

TheWall Street Journal’sJason Zweig wrote an intriguing piece last week on robo-advisors (web-based computer-generated investment advice), picking on the company Wealthfront. The firm had recently launched Wealthfront Risk Parity, a global mutual fund that invests in stocks, bonds, and commodities. The fund lost 9% in its first four months, but clients with over $100,000 were automatically investing up to 20% of their assets into the fund unless they stipulated otherwise. That wasn’t the interesting part. The interesting part, as Zweig pointed out, was that the Wealthfront Risk Parity prospectus said the new fund should be used only by investors who understand complex securities, are highly risk-tolerant, and who “intend to actively monitor and manage their investments in the fund.” Doesn’t that negate the whole point of a robo-advisor in the first place? It certainly drives home the importance of reading the fine print on investment vehicles, and on that note….

Junk bonds: Josh Hudson, our Director of Fixed Income just released a short piece on high-yield or junk bonds this week. The piece calls attention to some of the often hidden risks to this asset class, and it is definitely worth taking the four or five minutes it takes to read through it. Click here to view article.